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Can a rise in income inequality improve welfare?

Citation

Truglia, Ricardo Nicolás Pérez (2007). Can a rise in income inequality improve welfare?. Master's thesis / Doctoral dissertation.

Abstract

Since consumers are not thought to derive "intrinsic" utility from the consumption of status goods, the common vision among economists insists that relative concerns make everyone unhappy. Using a signaling-type model, I show that conspicuous consumption is a natural and efficient response of people to the absence of certain markets, especially if income is not interesting by itself. This implies that reducing inequality may be inefficient. Therefore I test this conjecture based on panel data for 10,000 respondents in Russia for 2000-2002, exploiting two identification strategies. The following results emerge: i. Regional expenditures inequality increases the marginal utility derived from consumption; ii. Aesthetic inequality distaste has been considerably underestimated by the literature; iii. The model is consistent with a utility function first concave and then convex; iv. The results remain unchanged after controlling for the income equivalence scale elasticity and a wide range of recent theories on Economics of Happiness.

URL

http://www.aaep.org.ar/anales/works/works2007/perez_truglia.pdf

Reference Type

Thesis

Year Published

2007

Author(s)

Truglia, Ricardo Nicolás Pérez